December 16, 1998
PHARMHOUSE CORP.
000 Xxxxxxxx
Xxx Xxxx, XX 00000
To the Members of the Board of Directors:
We understand that Phar-Mor, Inc., a Pennsylvania
corporation (the "Purchaser"), and Pharmacy Acquisition Corp.
(the "Merger Subsidiary"), a wholly owned subsidiary of the
Purchaser, has offered to enter into an Agreement and Plan of
Merger (the "Merger Agreement") with Pharmhouse Corp., a New York
corporation (the "Company"), pursuant to which, subject to the
terms and conditions set forth therein, the Purchaser will
acquire any and all of the issued and outstanding common stock,
$0.01 par value, of the Company (the "Common Stock") for $3.25
per share in cash (the "Offer Price") through a transaction in
which the Merger Subsidiary will be merged with and into the
Company and the issued and outstanding Common Stock will be
canceled and extinguished and converted into the right to receive
the Offer Price (the "Transaction").
You asked us to render our opinion as to whether the Offer
Price is fair, from a financial point of view, to the holders of
the Common Stock.
Xxxxxxxxx & Company, Inc. ("Jefferies"), as part of its
investment banking business, is regularly engaged in the
evaluation of capital structures and the valuations of businesses
and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private
placements, financial restructurings and other financial
services. In the ordinary course of our business, Jefferies may
trade the securities of the Company and the Purchaser for our own
account and for the accounts of customers and, accordingly, may
at any time hold a long or short position in those securities.
In connection with its engagement, Jefferies will receive a
fee for providing this opinion to the Company and will also
receive a success fee upon consummation of the Transaction. In
addition, Jefferies has received customary investment banking
fees from the Company for providing financial advisory services
related to the refinancing of the Company's senior credit
facility which occurred in May, 1998.
Jefferies also has provided investment banking services to
the Purchaser and received customary fees for rendering such
services. During 1998 Jefferies was retained by the Purchaser to
provide general corporate finance advisory services and has been
paid customary fees for such services. Jefferies will not
receive any compensation from the Purchaser in connection with
the delivery of this opinion.
PHARMHOUSE CORP.
December 16, 1998
Page 2
In conducting our analysis and arriving at the opinion
expressed herein, we have reviewed a draft of the Merger
Agreement, dated December 16, 1998 (including any schedules and
exhibits thereto which were provided by the Company) and certain
financial and other information that was publicly available or
furnished to us by the Company, including the financial terms of
the Transaction, certain internal financial analyses,
projections, budgets, reports and other information prepared by
the Company's management. We have also held discussions with
various members of senior management of the Company concerning
historical and current operations, financial condition and
prospects, as well as the strategic and operating benefits
anticipated from the business combination. In addition, we have
reviewed the reported price and trading activities of the Common
Stock, compared certain financial and stock market information
for the Company with similar information for other publicly-
traded companies that we considered relevant, reviewed the
financial terms of certain other business combinations that we
considered relevant and conducted such other reviews, analyses
and inquiries relating to the Company as we considered
appropriate in rendering this opinion. In accordance with our
engagement by the Company, Jefferies has not performed any due
diligence on the Purchaser or any of its affiliates.
In the course of our review and analysis and in rendering
this opinion, we have relied upon, but have not independently
investigated or verified, the accuracy, completeness and fair
presentation of the financial and other information that was
provided to us by the Company, or that was publicly available to
us (including, without limitation, the information described
above and the financial projections and projected operating
assumptions provided by the Company regarding its estimated
future performance). This opinion is expressly conditioned upon
such information (whether written or oral) being complete,
accurate and fair in all respects.
With respect to the financial projections provided to or
obtained and examined by us, we note that projecting future
results of any company is inherently subject to vast uncertainty.
You have informed us, however, and we have assumed with your
permission, that the Company's projections and underlying
projected operating assumptions were reasonably prepared on bases
reflecting the best currently available estimates and good faith
judgments of the Company management as to the future performance
of the Company. In addition, in rendering this opinion we have
assumed, with your permission, that the Company will perform in
accordance with such projections for all periods specified
therein. Although such projections constituted one of many items
that we employed in the formation of our opinion, changes to the
Company's financial projections could affect the opinion rendered
herein.
We have not been requested to, and did not, solicit third
party indications of interest in acquiring all or any part of the
Company; or make any independent evaluation or appraisal of the
assets or liabilities of, nor conduct a comprehensive physical
inspection of any of the assets of the Company, nor have we been
furnished with any such appraisals. Our opinion is based on
economic, monetary, political, regulatory, market and other
conditions existing and which can be evaluated as of the date of
this opinion (including, without limitation, current market
prices of the Common Stock of the Company); however, such
conditions are subject to rapid and unpredictable change and such
changes could affect the conclusions expressed herein. We have
PHARMHOUSE CORP.
December 16, 1998
Page 3
made no independent investigation of any legal matters affecting
the Company, and we have assumed the correctness of all legal and
accounting advice given to such parties and their respective
boards of directors, including (without limitation) advice as to
the accounting and tax consequences of the Transaction to the
Company and its stockholders.
In rendering this opinion we have also assumed, with your
permission, that: (i) the terms and provisions contained in the
Merger Agreement (including any schedules and exhibits thereto)
will not differ from those contained in the drafts of those
documents we have heretofore reviewed with respect to any matter
material to our opinion expressed herein; (ii) the conditions to
the consummation of the Transaction set forth in the Merger
Agreement will be satisfied without material expense; and (iii)
there is not now, and there will not as a result of the
consummation of the transactions contemplated by the Merger
Agreement be, any default, or event of default, under any
indenture, credit agreement or other material agreement or
instrument to which the Company is a party.
Moreover, in rendering the opinion set forth below we note
that the consummation of the Transaction is conditioned upon the
approval of the holders of the Common Stock, and we are not
recommending that the Company, its Board of Directors, any of its
security holders or any other person should take any specific
action in connection with the Transaction. Our opinion does not
constitute a recommendation of the Transaction over any
alternative transactions which may be available to the Company,
and does not address the Company's underlying business decision
to effect the Transaction.
Based upon and subject to the foregoing, and upon such other
matters as we consider relevant, it is our opinion as investment
bankers that, as of the date hereof, the Offer Price to be
received by the holders of the Common Stock is fair from a
financial point of view.
It is understood and agreed that this opinion is provided
for the use of the Board of Directors of the Company as one
element in the Board's consideration of the Transaction, and may
not be used for any other purpose, or otherwise referred to,
relied upon or circulated, without our prior written consent. We
expressly disclaim any undertaking or obligation to advise any
person of any change in any fact or matter affecting this opinion
of which we become aware after the date hereof. This opinion may
be reproduced in full in any proxy statement mailed to holders of
the Common Stock in connection with the Transaction but may not
otherwise be disclosed publicly in any manner without our prior
written approval.
Sincerely,
XXXXXXXXX & COMPANY, INC.
